Falling US stock market technical indicators flashing warning sign

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The gauges investors use to gauge the health of the U.S. stock market have taken a turn for the worse, fueling concerns that the benchmark could return to its mid-June bear market lows.

The S&P 500 is down 7% since mid-August after a sharp summer rally, hit by expectations that the Federal Reserve will raise interest rates higher than previously expected in its fight to bring down consumer prices from 40-year highs .

The pullback in stocks gave more cause for concern to those who monitor market phenomena such as range, momentum and trading patterns to inform their investment decisions. While many of these indicators painted an upbeat picture just a few weeks ago, they are telling a less bullish story now, raising concerns that this year’s market selloff may not be over.

“I had to downgrade the market technically given how severe the decline has been over the past three weeks,” said John Kolovos, chief technical strategist at Macro Risk Advisors.

“The odds of a market bottoming in June have dwindled to little better than a currency reversal at this juncture.”

Russell 3000 pullback https://graphics.reuters.com/USA-STOCKS/xmpjoalzxvr/chart.png

Among the factors investors study is market breadth, which shows whether a significant amount of stocks are rising or falling together. Positive market range, when more stocks are advancing than falling, indicates a high degree of confidence among stock bulls.

Recently, the range of the market has started to send alarming signals. The percentage of stocks trading above their 50-day moving average in the Russell 3000 has fallen to about 30%, from about 86% in mid-August.

“We want to see this index stabilize where it is now,” Kolovos said. “We don’t really want to see it go much lower than 25%.

S&P 500: Stocks rise at 3-month lows https://graphics.reuters.com/USA-STOCKS/klpykadagpg/chart.png

Meanwhile, the 15-day moving average of the percentage of S&P 500 stocks hitting new three-month lows — another gauge of stock market breadth — has climbed to about 10% from just above zero in mid-August, according to data from Thrasher Analytics. . It remained at about 60% of the June market low.

“We’re watching to see if we continue to see a downward expansion,” said Andrew Thrasher, the company’s founder. “If we see extended new lows, that will put downward pressure on the index.”

Lower for longer https://fingfx.thomsonreuters.com/gfx/mkt/znvnewlekpl/Pasted%20image%201662660473627.png

Additionally, the S&P 500 has remained below its 200-day moving average for five months, the longest such streak since May 2009.

Historically, the index has returned -3.56% in September when it is below its 200-day moving average during a year in which the United States holds midterm elections, as it will in 2022, according to BofA Global Research. The index is up about 1% month to date.

Head and Shoulders Peak https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrxeyzvm/Pasted%20image%201662558014008.png

Tech stocks have been hit particularly hard in recent weeks, with the tech-heavy Nasdaq Composite down about 10% since mid-August.

Some chart watchers see more trouble ahead for the index, which recently formed an uptrend known as a “head and shoulders top.”

The index already broke the so-called neck of the head and shoulders formation earlier this year, a bearish development. A drop to the recent low of around 10,500 could open the Nasdaq to a move to 8,800, ICAP analyst Brian LaRose said. The index closed Thursday at 11,862.

Yields rise, stocks fall https://fingfx.thomsonreuters.com/gfx/mkt/jnpwemxmopw/Pasted%20image%201662580713944.png

Of course, technicals can improve or worsen as markets turn and investors adjust expectations based on factors such as the trajectory of bond yields, which are determined by expectations of monetary policy and closely track how stocks have performed this year.

The yield on the benchmark 10-year note peaked at nearly 3.5% on June 14, just before the S&P 500 hit a recent low.

While stocks rallied as yields fell over the summer, a recent rebound in yields has accompanied the decline in stocks this month, with the 10-year yield now at its highest level since June 16.

Meanwhile, real yields, which strip out inflation and are seen as a key driver of risk asset prices, earlier this week stood at 0.88%, near their highest level since 2019.

The yields have “huge implications for what could happen in the coming months,” said Mark Newton, technical strategist at Fundstrat. “My own thinking is that yields are very close to a peak and should start rolling.”

(Reporting by Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and Matthew Lewis)

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